Economic and Fiscal Projections for Medium to Long Term Analysis

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1 Provisional Translation Economic and Fiscal Projections for Medium to Long Term Analysis January 21, 2016 Cabinet Office, Japan

2 Projections are conduc ted by the Cabinet Offic e s "Ec onomic and Fiscal Model," incorporating macroeconomy, public finance and social security synthetically. Therefore, the main economic variables such as growth rates, inflation rates, and interest rates are not exogenously assumed, but are endogenously obtained w ithin the model. Considerable leeway should be given when interpreting the projections shown here, because of various uncertainties.

3 1. Macroeconomic Scenario We conducted projections under two different macroeconomic scenarios. (1) Economic Revitalizatio n Case The following economic and fiscal policies are assumed to have sound effects: aggressive monetary policy, flexible fiscal policy, and a growth strategy that promotes private investment ( Japan Revitalization Strategy 1 ). In the med ium to long term, the average annual growth rate is projected to reach more than 2% in real terms and more than 3% in no mina l terms. The rate of change in the consumer price index (excluding the direct effects of the increase in the consumption tax rate) is projected to be stable, at around 2%, in the medium to long term. (2) Baseline Case Over the future, the domestic economy is assumed to grow approximately at the rate of current potential growth. In this case, in the medium to long term, the average annual growth rate is projected to be less than 1% in real terms and mid 1% in nominal terms. 2. Main Assumptions in Public Finance s It is assumed that the consumption tax rate (central and local combined) will be raised to 10% along with the introd uction o f the reduced rate for consumption tax in April 2017, and certain new expenditures will be added along with imp le me nting the reform of the social security system and others. This projection incorporates approximately 0.4 trillion yen (funded by deferring the introduction of the total aggregate system in social security) of the stable and permanent financial sources secured p ursuant to the FY2016 Tax Reform 2 in response to the decline in tax revenue (approximately 1.0 trillion yen) due to introducing the reduced rate for consumption tax. Approximately 0.6 trillion yen of the unincorporated remainder will be secured by taking legislative measures on revenues or expenditures, or other measures, by the end of FY2016. After FY2017, it is assumed that social security expenditure will increase due to population aging and that other general expenditures will continue to increase at about the same rate as the inflation rate. It is assumed that measures for recovery and reconstruction from the Great East Japan Earthquake will be implemented, the special tax for reconstruction will be carried out, and reconstruction bonds will be issued based on the Act for 1 Japan Revitalization Strategy as revised in 2015 (Cabinet Decision, June 30, 2015) 2 FY2016 Tax Reform (Cabinet Decision, December 24, 2015) 1

4 Securing F iscal Resources for Reconstruction, 3 Scale and Funding Sources for Recovery and Reconstruction Work during the Reconstructio n Period includ ing the Five-Year Period Starting in FY2016, 4 and others. 3 The Act on Special Measures for Securing Fiscal Resources Necessary to Implement Measures for Reconstruction Following the Great East Japan Earthquake (date of promulgation and enforcement: December 2, 2011) 4 Scale and Funding Sources for Recovery and Reconstruction Work during the Reconstruction, including the Five-Year Period Starting in FY2016 (Cabinet Decision, June 30, 2015) 2

5 3

6 Results of the Projections Real GDP Growth Rate In the, the real GDP growth rate is projected to reach more than 2% in the medium to long term, although it is temporarily reduced in response to the consumption tax rate hike in FY2017. (%) (%) Baseline Case (FY) Nominal GDP Growth Rate In the, the nominal GDP growth rate is projected to reach more than 3% in the medium to long term and achieve the 600 trillion yen target around FY2020 (approximately trillion yen in FY2021). (%) Baseline Case (FY) Consumer Price Index (rate of change) In the, the rate of change in Consumer Price Index is projected to be stable around 2% in the medium to long term, although it temporarily increases, reacting to the consumption tax rate hike in FY Baseline Case (FY)

7 Primary Balance of Central and Local Governments Combined * (ratio to nominal GDP) The primary deficit of central and local governments is projected to meet the fiscal target of halving the ratio of deficit to GDP from the FY2010 rate by FY2015 (approximately 3.3% of GDP; 16.6 trillion yen in FY2015). In the, the primary deficit is projected to remain approximately 9.2 trillion yen (1.7% of GDP) in FY2018, the year to review the progress of reform measures during the Intensive Reform Period (FY ) by the benchmark of about 1% of GDP, and approximately 6.5 trillion yen (1.1% of GDP) in FY2020, the target year for reducing the deficit to zero, and it is important to continue enhancing Integrated Economic and Fiscal Reforms. This projection incorporates approximately 0.4 trillion yen (funded by deferring the introduction of the total aggregate system in social security) of the stable and permanent financial sources secured pursuant to the FY2016 Tax Reform, responding to the decline in tax revenue (approximately 1.0 trillion yen) due to introducing the reduced rate for consumption tax. Approximately 0.6 trillion yen of the unincorporated remainder will be secured by taking legislative measures on revenues or expenditures, or other measures, by the end of FY2016. (%) % primary surplus -1% Baseline Case * Excluding the expenditures and the fiscal resources for the recovery and reconstruction measures. -1 (FY) Outstanding Debt * (ratio to nominal GDP) In the, the ratio of outstanding debt to GDP (excluding the reconstruction bonds) is projected to decline toward FY2024, although it should be noted that the long term interest rate is projected to be higher than the nominal GDP growth rate after FY2020, as the existing bonds issued at low interest rates will be refinanced sequentially. (%) Baseline Case * Excluding the reconstruction bonds. (FY) 12

8 Results of the Projections (Tables) Macroeconomy (%), [ratio to GDP, %], Trillions of Yen Real GDP Growth ( 1.0) ( 1.2) ( 1.7) ( 0.6) ( 2.5) ( 2.1) ( 2.2) ( 2.3) ( 2.3) ( 2.4) ( 2.4) Real GNI Growth ( 0.4) ( 3.0) ( 2.1) ( 0.7) ( 2.5) ( ) ( 2.2) ( 2.3) ( 2.3) ( 2.4) ( 2.4) Nominal GDP Growth ( 1.5) ( 2.7) ( 3.1) ( 2.4) ( 3.9) ( 3.5) ( 3.6) ( 3.7) ( 3.7) ( 3.8) ( 3.8) Nominal GDP Nominal GNI Per Capita Growth ( 2.2) ( 3.6) ( 3.5) ( 2.9) ( 4.2) ( 3.7) ( 3.8) ( 3.9) ( 4.0) ( 4.1) ( 4.2) Nominal GNI Per Capita ( Ten thousand yen) Potential GDP Growth ( 0.4) ( 0.6) ( 0.8) ( 1.2) ( 1.5) ( 1.8) ( 2.3) ( 2.3) ( 2.4) ( 2.4) ( 2.4) Change of Price Consumer Prices ( 2.9) ( 0.4) ( 1.2) ( 2.7) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Corporate Goods Prices ( 2.8) ( 2.9) ( 0.2) ( 2.7) ( 1.2) ( 1.1) ( 1.2) ( 1.2) ( 1.2) ( 1.2) ( 1.2) GDP Deflator ( 2.5) ( 1.5) ( 1.4) ( 1.8) ( 1.4) ( 1.4) ( 1.4) ( 1.4) ( 1.4) ( 1.4) ( 1.4) Unemployment Rate ( 3.5) ( 3.3) ( 3.2) ( 3.3) ( 3.3) ( 3.2) ( 3.2) ( 3.2) ( 3.2) ( 3.3) ( 3.3) Long term Interest Rate ( 0.4) ( 0.3) ( 0.7) ( 1.4) ( 2.2) ( 3.2) ( 3.9) ( 4.2) ( 4.4) ( 4.5) ( 4.6) Balance by Sector General Government [ 5.2] [ 5.1] [ 5.1] [ 4.1] [ 3.5] [ 3.3] [ 3.3] [ 3.1] [ 2.9] [ 2.9] [ 2.6] Private [ 6.8] [ 8.7] [ 9.2] [ 8.6] [ 8.2] [ 8.2] [ 8.2] [ 8.2] [ 8.1] [ 8.2] [ 8.0] Overseas [ 1.6] [ 3.6] [ 4.1] [ 4.5] [ 4.7] [ 4.9] [ 5.0] [ 5.1] [ 5.2] [ 5.3] [ 5.4] Central and Local Governments' Public Finances (Excluding the expenditures and the fiscal resources for the recovery and reconstruction measures) [ratio to GDP, %], Trillions of Yen Primary Balance (ratio to nominal GDP) [ 4.1] [ 3.3] [ 2.9] [ 2.2] [ 1.7] [ 1.4] [ 1.1] [ 0.7] [ 0.4] [ 0.1] [0.4] Central Government (ratio to nominal GDP) [ 4.4] [ 4.1] [ 3.4] [ 2.6] [ 2.4] [ 2.2] [ ] [ 1.8] [ 1.7] [ 1.4] [ 1.2] Local Government (ratio to nominal GDP) [0.3] [0.8] [0.5] [0.4] [0.7] [0.8] [0.9] [1.2] [1.3] [1.3] [1.6] Fiscal Balance (ratio to nominal GDP) [ 5.8] [ 5.1] [ 4.8] [ 3.9] [ 3.5] [ 3.5] [ 3.7] [ 3.8] [ 4.1] [ 4.3] [ 4.3] Central Government (ratio to nominal GDP) [ 5.6] [ 5.3] [ 4.9] [ 4.0] [ 3.8] [ 3.9] [ 4.2] [ 4.5] [ 4.9] [ 5.2] [ 5.5] Local Government (ratio to nominal GDP) [ 0.2] [0.2] [0.1] [] [0.3] [0.4] [0.5] [0.7] [0.8] [0.9] [1.2] Outstanding Debt (ratio to nominal GDP) [195.4] [197.5] [195.9] [195.0] [191.1] [188.2] [185.5] [182.8] [180.6] [178.5] [176.7] General Account of Central Government Trillions of Yen Expenditures General Account Expenditure Excluding Debt Repayment and Interest Payment Social Security related Expenditures Local Allocation Tax Grants, etc Others Debt Repayment and Interest Payment Revenues Tax Revenue Other Revenues Difference between Expenditures and Revenues Primary Balance in the General Account of Central Government Ordinary Account of Local Government Trillions of Yen Expenditures Debt Repayment and Interest Payment Revenues Tax Revenue Difference between Expenditures and Revenues Primary Balance in the Ordinary Account of Local Government Notes 1. In "General Account of Central Government," FY2014 is based on the Settlement, FY2015 is based on the Original and Supplementary budget, and FY2016 is based on the Draft budget. In "Ordinary Account of Local Government," FY2014 is based on the Settlement. 2. "General Account Expenditure Excluding Debt Repayment and Interest Payment" excludes carry back of settlement deficit compensation. 3. In "General Account of Central Government," "Other Revenues" in FY2014 consists of non-tax revenues and preceding fiscal year surplus received (excluding the balance carried forward fiscal resources to 2015). 4. In "Ordinary Account of Local Government," "Revenues" excludes local bonds, reduction of reserve, and the balance carried forward fiscal resources from total revenues. "Tax Revenue" is the total sum of local taxes and local transfer taxes. 6

9 Baseline Case Macroeconomy (%), [ratio to GDP, %], Trillions of Yen Real GDP Growth ( 1.0) ( 1.2) ( 1.7) ( 0.1) ( 1.4) ( 0.8) ( 0.8) ( 0.8) ( 0.8) ( 0.8) ( 0.8) Real GNI Growth ( 0.4) ( 3.0) ( 2.1) ( 0.1) ( 1.4) ( 0.7) ( 0.6) ( 0.6) ( 0.6) ( 0.6) ( 0.7) Nominal GDP Growth ( 1.5) ( 2.7) ( 3.1) ( 1.3) ( 1.9) ( 1.3) ( 1.3) ( 1.3) ( 1.3) ( 1.3) ( 1.3) Nominal GDP Nominal GNI Per Capita Growth ( 2.2) ( 3.6) ( 3.5) ( 1.9) ( 2.4) ( 1.8) ( 1.7) ( 1.7) ( 1.7) ( 1.8) ( 1.9) Nominal GNI Per Capita ( Ten thousand yen) Potential GDP Growth ( 0.4) ( 0.6) ( 0.8) ( 0.8) ( 0.7) ( 0.6) ( 0.7) ( 0.7) ( 0.8) ( 0.8) ( 0.8) Change of Price Consumer Prices ( 2.9) ( 0.4) ( 1.2) ( 2.1) ( 1.2) ( 1.2) ( 1.2) ( 1.2) ( 1.2) ( 1.2) ( 1.2) Corporate Goods Prices ( 2.8) ( 2.9) ( 0.2) ( 2.3) ( 0.4) ( 0.3) ( 0.5) ( 0.5) ( 0.5) ( 0.5) ( 0.5) GDP Deflator ( 2.5) ( 1.5) ( 1.4) ( 1.2) ( 0.5) ( 0.5) ( 0.5) ( 0.5) ( 0.5) ( 0.5) ( 0.5) Unemployment Rate ( 3.5) ( 3.3) ( 3.2) ( 3.3) ( 3.3) ( 3.3) ( 3.3) ( 3.3) ( 3.3) ( 3.3) ( 3.3) Long term Interest Rate ( 0.4) ( 0.3) ( 0.7) ( 1.0) ( 1.2) ( 1.5) ( 1.6) ( 1.8) ( 1.9) ( ) ( ) Balance by Sector General Government [ 5.2] [ 5.1] [ 5.1] [ 4.2] [ 3.9] [ 4.1] [ 4.2] [ 4.4] [ 4.6] [ 5.0] [ 5.4] Private [ 6.8] [ 8.7] [ 9.2] [ 8.7] [ 8.4] [ 8.6] [ 8.7] [ 8.7] [ 8.8] [ 9.0] [ 9.2] Overseas [ 1.6] [ 3.6] [ 4.1] [ 4.4] [ 4.5] [ 4.6] [ 4.5] [ 4.3] [ 4.1] [ 3.9] [ 3.8] Central and Local Governments' Public Finances (Excluding the expenditures and the fiscal resources for the recovery and reconstruction measures) [ratio to GDP, %], Trillions of Yen Primary Balance (ratio to nominal GDP) [ 4.1] [ 3.3] [ 2.9] [ 2.3] [ 2.1] [ 2.2] [ 2.3] [ 2.3] [ 2.4] [ 2.5] [ 2.6] Central Government (ratio to nominal GDP) [ 4.4] [ 4.1] [ 3.4] [ 2.7] [ 2.6] [ 2.6] [ 2.6] [ 2.6] [ 2.7] [ 2.6] [ 2.7] Local Government (ratio to nominal GDP) [0.3] [0.8] [0.5] [0.4] [0.5] [0.4] [0.3] [0.3] [0.2] [0.1] [0.1] Fiscal Balance (ratio to nominal GDP) [ 5.8] [ 5.1] [ 4.8] [ 4.0] [ 3.8] [ 4.0] [ 4.2] [ 4.5] [ 5.0] [ 5.4] [ 5.8] Central Government (ratio to nominal GDP) [ 5.6] [ 5.3] [ 4.9] [ 4.0] [ 3.9] [ 4.0] [ 4.2] [ 4.5] [ 4.8] [ 5.1] [ 5.4] Local Government (ratio to nominal GDP) [ 0.2] [0.2] [0.1] [] [0.1] [] [ ] [ ] [ 0.1] [ 0.3] [ 0.4] Outstanding Debt (ratio to nominal GDP) [195.4] [197.5] [195.9] [197.2] [197.2] [198.6] [200.3] [202.2] [204.6] [207.3] [210.4] General Account of Central Government Trillions of Yen Expenditures General Account Expenditure Excluding Debt Repayment and Interest Payment Social Security related Expenditures Local Allocation Tax Grants, etc Others Debt Repayment and Interest Payment Revenues Tax Revenue Other Revenues Difference between Expenditures and Revenues Primary Balance in the General Account of Central Government Ordinary Account of Local Government Trillions of Yen Expenditures Debt Repayment and Interest Payment Revenues Tax Revenue Difference between Expenditures and Revenues Primary Balance in the Ordinary Account of Local Government Notes 1. In "General Account of Central Government," FY2014 is based on the Settlement, FY2015 is based on the Original and Supplementary budget, and FY2016 is based on the Draft budget. In "Ordinary Account of Local Government," FY2014 is based on the Settlement. 2. "General Account Expenditure Excluding Debt Repayment and Interest Payment" excludes carry back of settlement deficit compensation. 3. In "General Account of Central Government," "Other Revenues" in FY2014 consists of non-tax revenues and preceding fiscal year surplus received (excluding the balance carried forward fiscal resources to 2015). 4. In "Ordinary Account of Local Government," "Revenues" excludes local bonds, reduction of reserve, and the balance carried forward fiscal resources from total revenues. "Tax Revenue" is the total sum of local taxes and local transfer taxes. 7

10 Central and Local Governments' Public Finances (Including the expenditures and the fiscal resources for the recovery and reconstruction measures) [ratio to GDP, %], Trillions of Yen Primary Balance (ratio to nominal GDP) [ 4.1] [ 3.2] [ 3.1] [ 2.4] [ 1.8] [ 1.5] [ 1.1] [ 0.6] [ 0.3] [ ] [0.4] Central Government (ratio to nominal GDP) [ 4.3] [ 3.9] [ 3.6] [ 2.8] [ 2.4] [ 2.3] [ ] [ 1.8] [ 1.6] [ 1.4] [ 1.2] Local Government (ratio to nominal GDP) [0.3] [0.7] [0.5] [0.4] [0.7] [0.8] [0.9] [1.2] [1.3] [1.3] [1.6] Fiscal Balance (ratio to nominal GDP) [ 5.8] [ 5.0] [ 5.0] [ 4.1] [ 3.6] [ 3.6] [ 3.7] [ 3.8] [ 4.0] [ 4.3] [ 4.3] Central Government (ratio to nominal GDP) [ 5.5] [ 5.2] [ 5.1] [ 4.2] [ 3.9] [ 4.0] [ 4.2] [ 4.5] [ 4.9] [ 5.2] [ 5.5] Local Government (ratio to nominal GDP) [ 0.2] [0.2] [0.1] [0.1] [0.3] [0.4] [0.5] [0.7] [0.8] [0.9] [1.2] Outstanding Debt (ratio to nominal GDP) [197.3] [199.2] [197.5] [196.5] [192.6] [189.7] [186.9] [184.1] [181.8] [179.7] [177.8] Baseline Case [ratio to GDP, %], Trillions of Yen Primary Balance (ratio to nominal GDP) [ 4.1] [ 3.2] [ 3.1] [ 2.5] [ 2.2] [ 2.3] [ 2.3] [ 2.3] [ 2.4] [ 2.5] [ 2.5] Central Government (ratio to nominal GDP) [ 4.3] [ 3.9] [ 3.6] [ 2.9] [ 2.7] [ 2.7] [ 2.6] [ 2.6] [ 2.6] [ 2.6] [ 2.6] Local Government (ratio to nominal GDP) [0.3] [0.7] [0.5] [0.4] [0.5] [0.4] [0.3] [0.3] [0.3] [0.1] [0.1] Fiscal Balance (ratio to nominal GDP) [ 5.8] [ 5.0] [ 5.0] [ 4.2] [ 3.9] [ 4.1] [ 4.3] [ 4.5] [ 4.9] [ 5.3] [ 5.8] Central Government (ratio to nominal GDP) [ 5.5] [ 5.2] [ 5.1] [ 4.2] [ 4.0] [ 4.1] [ 4.3] [ 4.5] [ 4.8] [ 5.0] [ 5.4] Local Government (ratio to nominal GDP) [ 0.2] [0.2] [0.1] [] [0.1] [] [ ] [ ] [ 0.1] [ 0.3] [ 0.4] Outstanding Debt (ratio to nominal GDP) [197.3] [199.2] [197.5] [198.8] [198.8] [200.2] [201.8] [203.6] [205.8] [208.5] [211.5] 8

11 (Notes) 1. "Consumer Prices" refers to the general index (nationwide). 2. "Balance by Sector" represents "Net lending/net borrowing" in the System of National Accounts (hereafter SNA). 3. "Fiscal Balance (hereafter FB) of the central and local governments represents "Net lending/net borrowing" in the SNA. "Primary Balance (hereafter PB) equals FB minus net receivable interest (receivable interest [excluding FISIM] minus payable interest [excluding FISIM]). The PBs of both the central and local governments include some special accounts in addition to the general account. Although the debt repayments and interest payments of the Special Account for the Local Allocation and Local Transfer Tax (hereafter SALALTT) are classified as Central Government in SNA, in accordance with their contributions, here they are divided into central and local governments. It should be noted that the PB in the General Account of Central Government equals the sum of Tax Revenue and Other Revenues minus General Account Expenditure Excluding Debt Repayment and Interest Payment. The PB in the Ordinary Account of Local Government equals the Revenues minus Expenditure excluding Debt Repayment and Interest Payment and Reserves. 4. The figures for Balance by Sector for general government, Fiscal Balance and Primary Balance of central and local government in FY2006, FY2008, FY2009, FY2010, and FY2011 exclude the transfer of funds from the Special Account for Fiscal Investment and Loan Program Funds (the Special Account for Fiscal Loan Program Funds for FY2006) to the Special Account for Government Debt Consolidation Funds and the general account as one-off factors. The figures in FY2008 also exclude the transfer of debts from the Japan Expressway Holding and Debt Repayment Agency to the general account, and the figures in FY2011 exclude the transfer of funds from the Japan Railway Construction, Transport and Technology Agency to the general account and others, as one-off factors. 5. Outstanding Debt is the sum of general bonds, special bonds for covering public pension funding, local government bonds, and borrowing in SALALTT. The central government s share of the borrowing allocated to the general account in FY2007 is included under outstanding debt in order to maintain the continuity of indices. 6. The amount of the expenditures and the fiscal resources for the recovery and reconstruction measures is the amount of the expenditures for recovery and reconstruction from the Great East Japan Earthquake that exceeds the transfer from the general account, which is compensated by the reduction of other existing expenditures, and is securely financed by such fiscal resources as the reconstruction bonds, securing further non-tax revenues, and special taxation for reconstruction, and the amount of the above fiscal resources. 7. The target of halving the ratio of the central and local governments primary balance deficit to GDP from the FY2010 rate by FY2015 is 3.3%, which is calculated on the basis of the ratio of deficit in FY2010, which is 6.6%. 9

12 The GDP growth rate and inflation rate for FY2014 are from the National Accounts for FY2014 and others, and those for FY2015 and FY2016 are from the Cabinet Office s Fiscal 2016 Economic Outlook and Basic Stance for Economic and Fiscal Management and others. (1) Assumptions on the Macroeconomy Appendix: Key Assumptions a) Total Factor Productivity (TFP) Growth Rate * The TFP growth rate remains as low as the current level (around 0.5% in July-September 2015) until FY2016, then it rises to around 2.2% (the historical average from February 1983 to October 1993) to the beginning of the 2020s. b) Labor Force * Based on the estimates of labor supply and demand for the case in which desirable economic growth and labor force participation (LFP) are achieved in Report of Labor Policy Study Group (December 1, 2015), the LFP rate of each gender and age group gradually rises, chiefly among females and the elderly (for example, the LFP rate among females aged gradually rises from around 71% in FY2014 to 80% in FY2024, the LFP rate among males aged gradually rises from around 53% in FY2014 to 63% in FY2024, and the LFP rate among females aged gradually rises from around 31% in FY2013 to 36% in FY2024). c) World Economy <Real GDP Growth Rate of World Economy (considering the export shares from Japan [10 major destination countries])> The growth rate moves at around 3.8% to 3.9% annually from FY2017 to FY2020, based on the World Economic Outlook (WEO) by the IMF (October 2015). From FY2021 onward, the growth rate remains constant, at around 3.8%. <Inflation Rate (considering the export shares from Japan [10 major destination countries])> The inflation rate moves at around 1.5% to 2.1% annually from FY2017 to FY2020, based on the WEO (October 2015). From FY2020 onward, the inflation rate remains constant, at around 2.1%. <Crude Oil Prices> From FY2017 onward, the price moves based on the rate of the World Energy Outlook by the IEA (November 2015), at around 3.8%. <Nominal Exchange Rate> From FY2017 onward, although the rate is influenced by the spread between domestic and overseas in the short term, it is assumed to maintain the real exchange rate constant in the long term (the nominal exchange rate changes to offset the difference in the inflation rates between Japan and the rest of the world). 10

13 Baseline Case Differences from the above are as follows: a) TFP Growth Rate * The TFP growth rate remains as low as the current level (around 0.5% in July-September 2015) until FY2016, then it rises to around 1.0% to the beginning of the 2020s. b) Labor Force * The LFP rate for each gender and age group remains constant, at the current level. c) World Economy <Real GDP Growth Rate of World Economy (considering the export shares from Japan [10 major destination countries])> The growth rate moves at around 3.0% to 3.1% annually, about 0.8 percentage points* lower than the rate based on the WEO (October 2015) from FY2017 to FY2020 (from around 3.8% to 3.9% annually). From FY2021 onward, the world economy growth rate remains constant, at around 3.2%. * Difference between the baseline projection and the lower bound of the 50% confidence interval in the WEO (October 2015). (2) Tax System * Tax revenues of the general account of central government in FY2014 are based on the FY2014 Settlement, in FY2015 are based on the Original and Supplementary Budget, and in FY2016 are based on the Draft Budget. * Based on the FY2016 Tax Reform (Cabinet Decision, December 24, 2015), the legislated tax system is assumed to continue. * Based on the Act on Special Measures for Securing Fiscal Resources Necessary to Implement Measures for Reconstruction Following the Great East Japan Earthquake (date of promulgation and enforcement: December 2, 2011) and the Temporary Special Provision on Local Tax to Secure Necessary Fiscal Resources for Local Governments to Implement Policies for Disaster Prevention Related to Recovery from the Great East Japan Earthquake (date of promulgation and enforcement: December 2, 2011), the projections reflect the implementation of the special tax for reconstruction and the rise in the individual inhabitant tax on a per capita basis. * The consumption tax rate (central and local combined) is assumed to be raised by 2% along with the introduction of the reduced rate for consumption tax in April The distribution of the increase in consumption tax revenue from 5% to 10% (central and local combined) is assumed to be 346/500 for central and 154/500 for local. It is assumed that the increase in the revenue of the government from the consumption tax hikes will be gradually realized by FY 2018 due to the gap between the time of the hikes (April 2017) and the taxable period of enterprises, interim measures concerning long term contracts and the amount of time until the local consumption tax is delivered to the local government. This projection incorporates approximately 0.4 trillion yen (funded by deferring the introduction of the total aggregate system in social security) of the stable and permanent financial sources secured pursuant to the FY2016 Tax Reform in response to the decline in tax revenue (approximately 1.0 trillion yen) due to introducing the reduced rate for consumption tax. Approximately 0.6 trillion yen of the unincorporated remainder will be secured by taking legislative measures on revenues or expenditures, or other measures, by the end of FY

14 (3) Expenditures * Expenditures in FY2014 are based on the FY2014 Settlement and others. * Expenditures in FY2015 are based on the FY2015 Original and Supplementary Budget and others. * Expenditures in FY2016 are based on the FY2016 Draft Budget and others. * From FY2017 onward, it is assumed that social security expenditure will increase due to the aging of the population and that general expenditures other than social security expenditure will continue to increase at about the same rate as the inflation rate (constant in real terms). * It is assumed that after the hikes of the consumption tax rate, legislation related to the Comprehensive Reform of Social Security and Tax will enable the gradual addition of certain new expenditures related to the implementation of social security reform and others, under the consideration on enhancement of stabilization of social security and fiscal consolidation in each fiscal year. * The series of Social Security Related Expenditures is endogenously obtained within the Economic and Fiscal Model based on future demographics and macroeconomic dynamics, and considerable leeway should be given when interpreting the projection since the series is significantly affected by policy and other external factors. (4) Assumptions on the Expenditures and Financial Resources for Recovery and Reconstruction from the Great East Japan Earthquake * From FY2017 onward, an expenditure pattern is assumed based on Recovery and Reconstruction Work for the Five-Year Period Starting in FY2016 (Reconstruction Promotion Conference Decision, June 24, 2015), Scale and Funding Sources for Recovery and Reconstruction Work during the Reconstruction including the Five-Ye ar Period Starting in FY2016 (Cabinet Decision, June 30, 2015) and others, such as the implementation so far. * In the projections, it is assumed that 32 trillion yen is secured by the special tax for reconstruction, a reduction of expenditures, non-tax revenues and others based on the Basic Guidelines for the Third Supplementary Budget in FY2011 and the Fiscal Resources for Reconstruction (Cabinet decision on October 7, 2011), Scale and Funding Sources for Recovery and Reconstruction Work from Now On (Reconstruction Promotion Conference Decision, January 29, 2013), Recovery and Reconstruction Work for the Five-Year Period Starting in FY2016 (Reconstruction Promotion Conference Decision, June 24, 2015), Scale and Funding Sources for Recovery and Reconstruction Work during the Reconstruction including the Five-Year Period Starting in FY2016 (Cabinet Decision, June 30, 2015), and others. 12

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